Summary
Adobe's fiscal 2013 second quarter showed the financial strain of its subscription transition. Revenue was $1.01B, down 10.1% from the prior-year quarter. Gross profit was $875.27M, down 11.9%. Operating income was $111.31M, down 63.5%. Net income was $76.55M, down 65.8%. Diluted EPS was $0.15, down 66.7%. Gross margin was 86.6%, down 1.7 percentage points. Operating margin was 11.0%, down 16.1 percentage points. For the six months, revenue was $2.02B, down 7.0%. Gross profit was $1.73B, down 10.6%. Operating income was $209.53M, down 64.7%. Net income was $141.66M, down 65.4%. Diluted EPS was $0.28, down 65.4%. Gross margin for the six months was 85.5%, down 3.4 percentage points. Operating margin was 10.4%, down 17.0 percentage points. The top line and bottom line both moved lower while the company pushed customers toward Creative Cloud and other subscription offerings. The company said the revenue decline was driven by the shift to subscription and enterprise term license agreements, which recognize revenue ratably.
The mix shift is visible in the revenue base. Subscription revenue as a percentage of total revenue increased to 25% from 14% in the year-ago quarter. Digital Media ARR was approximately $440.0 million as of May 31, 2013, an increase of $237.0 million, or 117%, from November 30, 2012. Adobe Marketing Cloud revenue increased 17% and 18% during the three and six months ended May 31, 2013, respectively. Digital Media revenue declined 18% in the quarter, while Digital Marketing revenue grew 11%. Print and Publishing revenue was relatively stable. The company said adoption of Creative Cloud and enterprise term license agreements drove the recurring revenue gains, but also caused perpetual license revenue to fall. Adobe expects subscription revenue to continue to increase as a percentage of total revenue. The company also said the number of perpetual units licensed decreased while subscription units increased.
Costs did not fall with revenue. The company reported that cost of revenue increased 3% year over year in the quarter, and operating expenses increased 11%. Research and development expenses rose 12%, sales and marketing expenses increased, and general and administrative expenses rose 9%. Restructuring and other charges included a write-down on the Waltham property assets. The company completed its annual goodwill impairment test and found no impairment. These expense trends explain much of the operating margin compression. The company said the increase in operating expenses was primarily due to higher incentive program achievement and stock-based compensation expense.
Cash flow and deferred revenue also reflected the transition. Operating cash flow was $299.15M in the quarter, down 33.3%. For the six months, operating cash flow was $621.18M, down 18.5%. Capital expenditures were $46.25M in the quarter, down 23.9%, and $106.44M for the six months, down 4.8%. Deferred revenue current portion was $638.88M, up 19.4% from the prior-year quarter. The company said the increase in deferred revenue was driven by subscription and enterprise term license activity for Creative Cloud and growth in Digital Marketing hosted services. Operating cash flow for the six months was primarily net income plus non-cash items, with working capital sources from lower trade receivables and higher deferred revenue.
The outlook remains tied to the subscription transition. Adobe expects total net revenue in fiscal 2013 to decline as Creative Cloud adoption accelerates. It also expects expenses not to decline in correlation with revenue, which will adversely affect net income and operating margin throughout fiscal 2013. The company plans to acquire Neolane for approximately $600.0 million in cash, with the deal expected to close in the third quarter of fiscal 2013. The company said it intends to integrate Neolane into its Digital Marketing reportable segment. Risks include execution of the subscription transition, foreign currency headwinds, tax uncertainties, and the closing conditions for Neolane. The company also noted that meaningful Creative Cloud renewal rate data will first become available later in fiscal 2013. Adobe will continue to offer and support CS6 while focusing future creative development on Creative Cloud. The company expects the transition to increase long-term revenue growth by attracting new users and keeping the customer base current.
Forecast
Reported figures
GAAP, from SEC filings| Metric | Q2 FY2013 | Q1 FY2013 | QoQ | Q2 FY2012 | YoY |
|---|---|---|---|---|---|
| Revenue | $1.01B | $1.01B | +0.3% | $1.12B | -10.1% |
| Gross profit | $875.3M | $851.2M | +2.8% | $993.5M | -11.9% |
| Gross margin | 86.6% | 84.5% | +2.2 pp | 88.4% | -1.8 pp |
| Sales & marketing | $402.2M | $398.0M | +1.0% | $386.5M | +4.1% |
| General & administrative | $120.9M | $132.9M | -9.0% | $110.6M | +9.3% |
| Total operating expenses | $764.0M | $753.0M | +1.5% | $688.4M | +11.0% |
| Operating income (loss) | $111.3M | $98.2M | +13.3% | $305.1M | -63.5% |
| Operating margin | 11.0% | 9.8% | +1.3 pp | 27.1% | -16.1 pp |
| Net income (loss) | $76.5M | $65.1M | +17.6% | $223.9M | -65.8% |
| Net margin | 7.6% | 6.5% | +1.1 pp | 19.9% | -12.3 pp |
| Diluted EPS | $0.15 | $0.13 | +$0.02 | $0.45 | -$0.30 |
Risks
Adobe announced in May 2013 that it will discontinue future development and new releases of perpetually licensed Creative Suite products and shift focus to Creative Cloud. MD&A states this transition has and will continue to cause traditional perpetual license revenue and total net revenue in fiscal 2013 to decline, while expenses are not expected to decline in correlation, adversely affecting net income and operating margin throughout fiscal 2013; reported FY2013 Q2 revenue fell 10.1%, operating income fell 63.5%, and net income fell 65.8% versus FY2012 Q2.
Subscription and cloud offerings recognize revenue ratably, deferring revenue and cash received; MD&A notes downturns or upturns in sales may not be immediately reflected in reported results and a decline in new or renewed subscriptions may reduce future quarters. The current portion of deferred revenue rose 19.4% to $638.9 million in FY2013 Q2 versus FY2012 Q2, while total revenue fell 10.1% in the quarter.
Adobe cannot predict subscription renewal or upgrade rates; Creative Cloud launched in May 2012 and most subscriptions are annual, so meaningful renewal data will first become available later in fiscal 2013. Customers have no obligation to renew and some may cancel, which could cause revenues to decline.
Markets face intense competition, evolving standards, lower-cost or free limited-functionality alternatives, and digital application marketplaces with exclusive distribution for certain platforms. Consolidation among competitors may increase competitive pressure and harm results.
Uncertainty about economic and political conditions could cause customers to delay or reduce technology purchases, advertising, or marketing spending, leading to longer sales cycles and lower revenue. MD&A states the U.S. Dollar strengthened against major currencies, causing revenue in EMEA and Japan measured in U.S. Dollar equivalents to decrease, and reported FY2013 Q2 total revenue fell 10.1% versus FY2012 Q2.
A significant amount of application product revenue is from one distributor, Ingram Micro, which represented 9% of net revenue for the second quarter of fiscal 2013. If this distributor or the broader indirect channel does not effectively market or sell Creative Cloud subscriptions, Adobe may lose sales opportunities, customers, and revenues.
Security vulnerabilities in products and systems could lead to reduced revenues or liability; Adobe notes hackers have obtained limited access to certain source code in the past and may do so again. Hosted services hold large amounts of customer data, and unauthorized access or data loss could harm reputation, cause customer loss, and expose Adobe to claims.
Increasing regulatory focus on privacy and expanding laws could impact new business models and increase liability; Adobe collects and stores information derived from customer website visitors and relies on customer representations without formal audits. Noncompliance or perceived privacy invasions could lead to class actions, reputational harm, and regulatory claims.
Adobe depends on senior management and highly skilled personnel, and competition for talent in the information technology industry is intense in many locations where employees are based. Failure to attract, retain, and motivate key personnel or maintain corporate culture could harm long-term strategic planning and execution.
Adobe has acquired and may continue to acquire companies, products, or technologies, including the pending approximately $600.0 million cash acquisition of Neolane SA expected to close in Q3 fiscal 2013. Integration risks include difficulty retaining personnel and customers, disruption of ongoing business, and failure to achieve anticipated benefits.
SaaS KPIs
All quarters →Total Digital Media ARR
Summary, forecast, risks and KPIs are extracted from ADOBE INC.'s SEC filings for Q2 FY2013 (10-Q / 10-K and the 8-K earnings release); GAAP figures in the summary are checked against the reported XBRL data. They can contain errors; the filings are authoritative. Processed Oct 8, 2026.